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In the first article in the
series of understanding how the economic machinery works, we introduced
transactions, credit, interest rates and inflation (the article can be
read here). In
the second article, we dealt with the importance of credit and introduced
deleveraging (the article can be read here). In this part (third), we will
delve into the impact of deleveraging and introduce fiscal deficit and
quantitative easing. The concluding part would weave all the different parts of
the economic machinery together to help the readers take a view on the current
economic scenario in India.

Impact of deleveraging

In the previous articles we saw
that deleveraging happens when the rate of increase in debt outpaces the rate
of growth of income. Incomes fall, people and organizations cut spending or
austerity measures are taken up, such as projects halt, pay cuts for employees,
bonuses come down and unemployment increases.

Then the government tries to
redistribute wealth by increasing its spending for generating employment. The
spending of the government more often is larger than the income in such
scenarios. This creates fiscal deficits.

During deleveraging the income
falls more than reduction in debt due to the austerity measures. This is
deflationary and painful. It may even lead to an extreme case of recession,
also known as depression. This is a classic case that has repeated many times
in history. For example, even Hitler came to power because of the social
disharmony created by depression.

In such scenarios, many economies
resort to printing more money. The central bank buys financial assets from the
government, who in turn engages in spending to generate employment and lift
demand. This is called quantitative easing.

Printing money has an impact on
the exchange rate as the supply of currency being printed increases in the
market.

The central bank must play very
safe and must strike a balance such that the income growth is larger than the
rate of growth of debt. Once deleveraging begins, going back to the boom
periods usually takes 7-10 years. Hence, it is called “the lost decade”.

The debt to GDP ratio of India
stood at around 68 percent in 2013. While this ratio is much lower than in
countries like US and many European nations, the interest payments and
principal repayments make India very vulnerable. The fiscal deficit of India
has been on the rise since 2008 and reached alarming levels in 2011-12.

This also had an impact on the
exchange rate. The Indian rupee started to depreciate again the dollar as the
fiscal deficit widened, the GDP growth rate started to come down, and inflation
was at an all time high. The flight to a safer currency (US Dollar) meant that
the Indian currency depreciated. This caused great deal of concern to importers
as their imports, which are often priced in US Dollars, became more expensive
in terms of Indian rupees.

In fact, The Indian economy has an underground economy, with an alleged 2006 report by the Swiss Bankers Association suggesting India topped the worldwide list for black money with almost $1,456 billion stashed in Swiss banks. We are not only a rich country, but we can actually take on more debt if we had that money in India and really wipe the tears off every citizen and more.

The above is a pretty complex but easy to understand story of how the economic machine works. We as citizens often get lost because we look at things at the microcosmic level and hence react emotionally. But if we were to see the big picture then we can play really smart in more ways than one.

In the next piece we shall delve deeper into the state of the Indian economy currently and the uphill task the next occupants of the North Block face.

Friday, April 11, 2014

I am a PhD in finance with a stable job and the
assurance of a fixed expected salary every month. My husband is an
entrepreneur, and worries daily about weather, inventory and changing prices.
To use a cliché, we are as different as chalk and cheese.

Yet, there is something that binds us. Our journeys.
His journey comprised of leaving a comfortable job and creating something of
his own. Mine comprised of devoting about six years of my life to doing a PhD,
after having already spent 19-20 years studying.

While doing a PhD is not often compared to being an
entrepreneur, there are more comparisons than meets the eyes.

The investment in terms of time and the opportunity
cost of not taking up (or leaving) a job is huge as the stipend paid to a PhD
student is far below what he or she would earn by working in the industry, just
as the first few years of an entrepreneur is spent thinking about every penny.
On top of it, the horror tales of endless hours one has to put in, the ever
shifting finishing line, and the failures dissuade many from taking up a PhD
program, just as the same reasons prevent many from leaving their jobs.

There are many who take up a PhD program but abandon it
midways. Excessive reading, long hours, low pay, when other batch mates from
graduation and post graduation days go for long foreign holidays and eat at expensive
places, wear expensive clothes, it keeps reminding you of the life that you
could have had! Sure enough, I keep reminding my husband of all the foreign
vacations that we could have had!

Then there are others who take it up and stick to it
till they finish. Once they decide to stick to the program, it does not take
long for them to realize that they have made an investment which would change
the way they think forever. The key is of course to get into a good PhD program
which gives you rigorous training. A startup’s story is pretty much the same.
Once it survives a few years, the chances of its success are high.

The coursework in a PhD program intellectually
stimulates, teaches one to learn beyond the superficial and to dig below the
surface. An entrepreneur goes beyond the theory and thinks out of the box to
reach its customers. He must always innovate and improvise.

Next comes the periods of independent study. Most of
the PhD programs have long periods of independent study, where the candidate is
given time to read, formulate the hypothesis, review the literature etc. It is
easy to keep postponing all this as there may not be anyone watching or asking
for progress at frequent intervals. Discipline and self-motivation is the key
here. Without discipline, one may take eight to nine or may be more years to
complete their thesis.

When I complain about the long hours that my husband
spends in the office, his reply is usually, “if I don’t do it, who will?” Since
an entrepreneur is his own boss, spending that extra hour in the office takes a
lot of motivation.

An important milestone is getting the proposal ready.
Curiosity to find something, to discover something new, or to fill an important
gap in the existing body of literature results in a good defendable proposal.
Some people are born curious but others acquire the curiosity when they
repeatedly read about a single topic and related work. Similarly, for the
entrepreneur, that first product or the first order is the most important
milestone. It can be the defining moment for the venture.

The process of writing a thesis is actually a process
of self discovery. The journey itself seems like the destination. The quest for
accuracy, for measurement and deduction, the single minded pursuit of data
collection, learning to write and run codes (which have become an integral part
of doing a PhD now a days) which one earlier thought one was never capable of
doing, are all activities which stretch the boundaries of learning.

An entrepreneur also discovers that while his core
competency might be marketing or finance, he is an office boy to a CEO, an
accountant to a strategist, all rolled into one.

Then comes the stage where the comments of the
supervisors, advisors and friends start coming in. Incorporating changes and going
through the drafts of the thesis numerous times needs patience. There is no
choice. If one does not have this trait, they simply have to acquire it, just
like an entrepreneur keeps revising his product and strategies as the business
progresses.

When the thesis is submitted after all the years of
hard work, the feeling is unbeatable. The defense of the thesis and the award
of the degree is the stepping stone to a career in academics and lifelong
learning. Similarly, when a venture succeeds, it brings immense joy and wealth
to the entrepreneur.

So, if you are passionate about something, either do a
PhD in it or become an entrepreneur with a venture revolving around your
passion!